Most of my clients have predictably busy and slow seasons. Of course they would prefer to have steady business year-round with no timing conflicts, but I will write a fantasy blog another time. Today I want to expose an opportunity many companies are missing.
If you continue to let yourself get caught in the doldrums without a plan, then you will probably have to take it out on your employees. You know, reduce hours, turn down project ideas, or institute lay-offs all for lack of cash. It’s demoralizing and if left untreated, debilitating.
It begins with a change in mindset: There are no slow months. There are periods where revenue is down, but there is always much work to do. The question is, how can we get it done without cash flow?
Let me share a story about my early career as an Operations Manager. This is good stuff: it taught me to like accounting!
We weren’t having a bad year, but profit was unexpectedly low in November and that made the expected low profit in December more foreboding. Conventional wisdom said we should cancel or cut back on the annual Christmas party or reduce bonuses, but our CFO spoke up and explained why that wasn’t necessary.
He explained how he had been accruing money all year for those expenses. In effect, the party and bonuses were already funded and the money sitting in the accounts. He went on to explain that he could just as easily reduce or eliminate those accrued expenses if we felt it was necessary. After all, “We haven’t actually spent the money yet.”
- Accrual: Definition: Accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged. The term “accrual” refers to any individual entry recording revenue or expense in the absence of a cash transaction.
Being an Operations guy, I connected the dots: “You mean, that you made other months of the year less profitable in order to make December seem more profitable?”
Being a Tax Accountant, he replied, “Actually, what I did was share an annual cost equally across all months. The overall profitability of the firm was not affected.”
“In other words,” I said, “December didn’t generate the expense by itself, the year did? Awesome!”
Later I learned that this discipline was made possible by budgeting (and having mad accounting skills). We applied accruals to correct timing issues such as expenses occurring in a different month than the corresponding revenue. We also used accruals to spread expense budgets for supplies and materials throughout the year.
Which is why I was able to buy new shelving for the warehouse, receive, and install it in July when we had no business to speak of. July didn’t have to cover that expense on its own. We accrued the cost in the six months leading up to it.
Now, what was I going to say about downtime and cash flow? Oh yeah!
You are missing the chance to get valuable work done during slow time: Maintenance, training, cleaning, repairs, certification, team development, the list goes on and on… With the right planning, it’s all paid for in advance.
Now, go hug your accountant.